Funding is perhaps the most crucial thing to starting up a company. Without sufficient capital, it is difficult if not impossible to run operations that provide revenue, and expand operations to develop capabilities.
One of the methods of getting funding is through investments, but depending on the nature of the business, there may or may not be investors. Aside from this, every company still needs cash for various expenses and also for working capital. Here are 5 things to consider before applying for loans.
#1 Can You Repay The Loan
This is perhaps the most obvious, since being unable to pay off the loans will result in rather serious consequences, which may affect your ability to loan funds in the future.
Short-term loans are typically paid off in full in the short term, whereas long-term loans typically have a fixed, incremental repayment schedule. Regardless of which type of loans are taken, it is important to consider if the projected receivables are sufficient to cover the long-term loan repayments, on top of covering other recurring expenses such as staff salaries.
Bear in mind that under the employment act, salaries must be paid within 7 days after the end of the salary period. Before thinking about repaying loans and the schedule of repayment, you must first consider whether you can pay the other monthly overheads.
#2 What Your Cashflow Looks Like
Some businesses receive revenue every month, and it differs based on whether business is good. Other businesses receive revenue only during certain periods, such as when a project is completed. These payments may also face delays, especially if there are problems with the project that need to be rectified first.
Businesses usually still have recurring expenses such as staff salaries and other overhead costs like office, and these must still be paid for on a monthly basis.
Taking a start-up loan first and using the cash to buffer for cashflow is costly, because interest is paid on the loaned cash in the meantime. However, instead of doing this, it may instead be more prudent to take short-term loans instead, which have relatively short repayment schedules but can serve as an adequate buffer.
Loans such as invoice financing can help companies to pay for material costs upfront, and they can be repaid when the project has been completed, and revolving term loans provide flexible access to funds.
Read Also: Business Term Loan Vs Revolving Term Loan: Which Should You Choose For Your Business?
#3 Rent Or Buy
Whether it is for equipment such as laptops or heavy machinery or even commercial properties, there is the option to rent rather than to purchase, and in some situations, it may be preferable to do one rather than the other.
One of the pros of renting equipment is the fact that you get to try out to see if the equipment fits your needs, and if it doesn’t, you can select a different model, however the drawback is the fact that the equipment may not be brand new, so it may have suffered some wear and tear, and you may not get to choose the condition of the equipment you rented before renting.
If well-maintained, purchased equipment such as laptops may be able to last for a long while, which may make it more worthwhile than rented equipment. The longer you use it, the more worthwhile the equipment becomes.
Nevertheless, renting does not require a loan for the equipment. Purchasing will most likely require a loan especially if the equipment cost is high, but depending on the loan taken, there may be some flexibility with regards to repayment schedule.
#4 What Government Grants Can You Tap On First
There are many government grants available which can help provide some capital for startups. Before taking a loan, you should try checking out available grants.
One grant that could be utilised is the Enterprise Innovation Scheme, which grants 400% in tax deductions on up to $400,000 of qualifying expenditure on areas such as R&D and staff training. While this grant does not directly help with cashflow, it can help the company build capabilities.
The Productivity Solutions Grant (PSG) also gives subsidies for companies to adopt digital solutions which could help their business. These grants are a relatively low-risk way for companies to trial various systems before deciding if they should adopt the system.
#5 Consider Government-Assisted Loans
Government-assisted loans come with a 50-70% risk share, which at first glance may seem like the borrower only needs to return a certain amount of the money in the event where the company goes under. While the borrower will most certainly still be held responsible to pay back 100% of the loan, the risk share allows the banks to offer more attractive loan terms, such as lower interest rates, higher loan quantum, or offer loans without requiring collateral.
One example of a government-assisted loan is OCBC’s Business First loan, which allows businesses to borrow up to $100,000 over 5 years without collateral. Businesses which have been incorporated in Singapore for at least 6 months may apply for this loan.
Another government-assisted loan is the OCBC Working Capital Loan. Businesses which have at least 30% Singaporean or PR shareholding and been incorporated for at least 2 years can borrow up to $500,000 without collateral.
Some other government-assisted loans such as the Enterprise Financing Scheme – Green provide special terms to incentivise companies to adopt green initiatives.
Read Also: [2024 Edition] Complete Guide To SME Business Loans In Singapore
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